Tax Reform Has Passed!

By Ryan Fair, CPA, CFP

You may or may not have heard, but Congress actually did something!  And this “something” was a big something that will affect all of us for years to come: Tax Reform.  What does this really mean and how will it effect you?

Most importantly, nearly all of us will see a decrease in federal tax due to the government.  There are several significant changes that lead to lower taxes, but I will focus on those with the most widespread impact.

First, the tax brackets have decreased across the board.  Congress teased us that they were going to consolidate the number of tax brackets for tax payers to fall into, but this didn’t happen.  We are still left with 7 brackets, but all of them have decreased by at least a couple of percent. 

Second, the standard deduction has seen a significant increase.  In year’s past, only about 30% of American’s itemize their deductions.  The remainder rely of the standard deduction because for them, it has a greater benefit than itemizing.  With tax reform, even fewer Americans will need to itemize their deductions.  This bill has nearly doubled the standard deduction to $12,000 for Single filers, and $24,000 for Married Filing Joint filers.  This will result in more of us opting for the standard deduction, thus lowering the amount of income that we pay tax on.

Part of the trade off to the higher standard deduction is that we will no longer receive an exemption deduction for each dependent in the household.  Currently, for each dependent claimed, there is a deduction of $4,050.  This will no longer be the case.  It has been eliminated, and will in-essence be consolidated with the standard deduction. 

However, in addition to the increase to the standard deduction to help offset the fact that there are no longer deductions for dependents, congress has vastly improved the Child Tax Credit.  Under the old system, taxpayers were allowed a credit against their tax liability of $1,000 for each qualifying dependent child.  Congress has doubled this credit to $2,000 for each dependent child under age 17!  For many of us, this will mean an additional $1,000 back on your tax return.  And, in prior years, this original $1,000 credit was reduced or eliminated for many middle-class families based on their income being too high.  However, this reform has increased the income levels that will allow many more taxpayers to benefit from the increased child tax credit.  What about those of you that are no longer allowed to claim the child tax credit because your child turned 17?  The tax bill has added a new $500 temporary credit for you to claim for your other dependents that don’t meet the ‘Child Under 17’ requirements.  This will help many taxpayers that have had their child tax credit completely eliminated on their 17^th birthday.

There are numerous other tax issues that were rumored to be changing with the tax bill, but after negotiations, were left in place.  Those with student loans can continue to deduct the interest.  If you are a teacher, you are still allowed to deduct up to $250 of your out of pocket classroom supplies.  The adoption credit remains.  Medical expenses can still be deducted if you do itemize your deductions.  You still have to clear a minimum threshold, but that threshold has been reduced back to 7.5% of AGI for all taxpayers again. 

While I have focused on the benefits than we as individual taxpayer’s will see, businesses are also getting significant benefits.  They are arguably seeing even larger benefits that individuals based on the decrease in federal tax rates.  The amount of tax due by large corporations will decrease significantly.  This should allow business owners to reinvest in new equipment, new employees, new technology, etc.  It is hoped that these new investments will lead to a snowball effect of improvement for the economy and our country in general.  Time will tell us the answer on this, but I am excited to find out what the future holds!

The final part of good news is that all of this becomes effective for the 2018 tax year.  This will have no impact on your 2017 income tax returns that we are about to begin working on.  Congress has said that we should begin seeing changes to our paychecks in February however.  Now that the bill has passed, the IRS will rework the withholding tables for the payroll departments across America.  They updated withholding tables should lead to a decrease in Federal withholding on our paychecks, leading to higher take home pay.  When we complete your 2018 tax return (filed in early 2019), we will be able to see the precise impact on your total Federal tax compared to the prior year. 

If you have further questions about this, we are happy to help.  Also, while you are thinking about taxes, please give us a call and schedule your spring tax planning appointment with us for the preparation of your 2017 taxes.  With all of these changes, there is no better time than now to plan for your 2018 taxes!  Be proactive and plan so that you can take advantage of the changes taking place.  Our team is ready to serve you during the upcoming busy season.